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Sustaining Charitable Projects Thru Microlending Most microlending programs are a) funded in America, b) managed by Christian businessmen and women employed by NGO's (National Government Organizations-Governmentally Approved Charities) in a variety of countries, c) require clients to save, attend regular meetings, pay interest and tithe, in addition to repaying all principal every six months. It is thru the peer pressure of semi-monthly meetings that all clients are encouraged to meet their financial obligations to the NGO. Thus, a microlending program in a given country or locale is something that is done with a great deal of planning and education. First, an NGO or for-profit business must be formed within the country or locale being served. Hopefully, these programs may be established within the non-profit sector in order to avoid paying taxes on whatever profits might be generated. If the funds that would be required for paying taxes are reinvested into the microlending program, obviously the rate of compounding is dramatically increased. This NGO will be most successful when it has a close collaborative effort with several established churches and/or denominations within the Christian community. Separate, but interdependent programs have been the best model for success. Multiple church sites offer the NGO multiple forums to explain the microlending program. A key component for success of the program is the requirement that all clients tithe 10% of their earnings to the local churches. Those churches, in turn, agree to support the NGO by having the clergy regularly encourage clients to perform as agreed. This helps have the principal and interest repaid on time, every time. These churches can also agree to help support the NGO's charitable work as a condition of participation, if desired. The second step is for the organizers to determine the approximate size of each individual loan that will be granted and the number of initial clients. These two factors dictate the size of the endowment required. Certainly, the most successful programs start with a phased approach to expansion, usually starting phase one with a limited goal of 100 clients. This gives the Executive Director of the program time to implement a series of good management practices that will help insure future successes of the program as it expands to additional clients. This process also gives the sponsors in the more well-to-do countries time to raise the funds necessary to properly endow the project. Some countries have limits of $100 USD; others have limits of $300 USD. Some microlending efforts in the US have limits of $1500. The poorer the country or locale, the lower the limit should be. Sierra Leone normally lends $50, occasionally $100. All loans should be for six months, unless it's an animal multiplication program based upon gestation period. The third step is to choose a Board of Directors for the program. The Board of Directors should be 5 to 13 people who have direct responsibility for hiring and managing the Executive Director (preferably an odd number of people to insure a majority when voting). This board should be comprised of both men and women, who are recognized as being successful in their profession in their locale. The board should be comprised of at least 40% women, because the majority of the clients will be women and these board members may have greater empathy for their needs. Successful programs recognize that the greater the qualities and influence of the board members, the greater the probability of success of the organization. All board members as well as the Executive Director and the staff that reports to him, should have excellent 'people skills'. They should enjoy getting to know new people and enjoy helping others. This board is important to the Executive Director, as it provides him a forum to identify progress towards the mutually agreed upon goals. And the board also can give the director encouragement and direction as the microlending business develops. Each board member serves without pay, but receives recognition within the community due to their participation on this board. An annual celebration banquet should be scheduled to recognize each board member's contribution, as well as recognizing outstanding entrepreneurs. Normally board members are given the opportunity to serve via a recommendation of one or more clergy in the locale. The Executive Director does not choose his board members. Board meetings are held monthly. The fourth step is for the Board of Directors to choose an Executive Director. Only the Executive Director and his staff are paid by the NGO. The Executive Director reviews all loan applications, accepts all Regional Directors recommendations and presents all loan applications to a subset of the Board of Directors at their monthly meeting: the Loan Review Committee. If a loan is turned down, then the client is upset at the Loan Review Committee, not any one individual. This is a very effective face saving mechanism, which is extremely important in some countries. It is imperative that the Executive Director be of excellent character and be known in the community as a responsible, Christian businessman. One of the most important characteristics of this leader is that they must be able to clearly communicate the vision of this program to multiple groups of people and have the ability to travel around the locale to convince potential clients of the benefits of this program. This leader can come from a variety of backgrounds, however it is imperative that this leader consider this job as their 'ministry' to help the people in their locale or country. (Bill Hybels book, 'Courageous Leadership' should be required reading for the Executive Director.) Then, the organizers, the Board of Directors and the Executive Director work together to accomplish their first job together: establish the interest rate that will be required to make the program work. This rate must be set considerably higher than 'investment grade or bank rate', because clients will have no collateral. This rate must be set considerable lower than the 'loan shark' rate in order to make the loan appealing to the clients. This rate must also be set considering the rate of inflation; it needs to be high enough to insure sustainability. This causes the rate to be much closer to the 'loan shark' rate than the 'investment grade' rate. This rate must also be set high enough to make the entire program sustainable by paying for all costs of the program. For example, if the rate was being set in the USA, the 'loan shark' rate may be near 30% per annum. The 'investment grade' rate may be near 5% per annum. Assuming that the inflation rate in the USA is 2% per annum, the microlending rate would need to be at least 20% per annum. Depending upon the amount of the endowment and the ongoing costs of the microlending staff and office expenses, the rate might need to be higher, although 26% may be top rate in the USA. If the rate is higher, the client loses their incentive to come to the microlending staff for a loan. Why would a client pay 26% interest and agree to tithe their income if they can go to a loan shark and pay 4% more and not need to pay tithe? The fifth step is a step of organization. The Executive Director needs to hire a part time bookkeeper/secretary and later, one Regional Director. The Regional Director's position should remain vacant while the Executive Director is 'making the rounds' to explain the program to various clients. Note: The Executive Director should focus his efforts on a 'tight geographic circle' in order to minimize travel for the Regional Director when collecting funds as explained below. This is also a good time to establish a banking account for the NGO. Funds for paying the full time director and the part time bookkeeper need to be transferred to the account immediately for paying of salaries. However, the funds for establishing the microlending endowment may be delayed for one to three months until clients are identified. The Regional Director's job is to go to each 'solidarity group's' (defined below) month end meeting and collect all interest payments due the NGO. He then accounts for the funds and identifies all interest payments collected by individual client name and his monthly tally sheet is signed by the group's Treasurer. Additional Regional Directors may be added in the future as travel needs dictate. The sixth step is to qualify the microlending clients. Everyone wants a loan if they think they don't have to pay it back. Successful microlending programs start with a requirement that anyone who wants to be a client must first start off with a savings plan at the NGO. This savings requirement is, by necessity, very small at the beginning of the program. Start up amounts vary by country, but a rule of thumb is for the Board of Directors to set a requirement equal to one hours pay in the locale. Clients may add to this at any time and they may withdraw the funds at any time. A client may not withdraw her savings account down below the start up amount, if she has a loan outstanding. Clients are required to add to their savings account every six months by adding a deposit equal to the opening deposit. If a client does not have a loan outstanding and she withdraws her savings account below the start up amount, she cannot receive a loan for six months from date of withdrawal. Historically, successful microlending programs have not paid interest on these savings accounts during the first one or two years. After this start up period of one or two years, some programs pay 'investment grade' interest on the accounts. Another step in qualifying the clients is to require them to join 'solidarity groups'. A solidarity group is a group of people from 7 to 13 people who agree, in writing, to be responsible to pay for any and all loans made to anyone within their solidarity group. This is a major pillar of success for a successful microlending program! Once a solidarity group is formed, officers of President, Vice President, Secretary and Treasurer are identified within the group and the group chooses a name. The President presides over the semi-monthly meetings. The Vice President presides over the meetings in the Presidents absence. The Secretary records all business brought to the group, e.g. loan requests, loan disbursements and interest payments. The Treasurer collects all funds due the NGO and awaits the Regional Director's visit for payment. Many times groups are named for biblical characters. When recognition or awards are given from the NGO, they are given to the group, as well as outstanding individuals. People are free to form or join any solidarity group they desire. If they form a group, everyone in that group must agree, in writing, to pay for any loan made to anyone in that group. If they join a group, then everyone in that group must also agree, in writing, to pay for any loan made to the new member. This keeps the deadbeats out. Would you 'cosign' a loan for anyone you knew was a deadbeat, knowing that you would have to pay their loan back to them? Another rule is that no one in the solidarity group may receive a loan if any member of the group is behind in their payments. Another qualification for the potential clients is that they agree to attend semi-monthly meetings of their group to identify how their business is going, what problems they're having and how they have their interest payment ready for the Regional Director at the end of the month. If problems occur, the solidarity group comes up with solutions to resolve them. Fledgling entrepreneurs are not left on their own to sink or swim (or flee). Another step in qualifying clients is to require a written business plan signed by all members in the group. The business plan may be something as simple as, "I need a loan to buy supplies so I can make candy and sell it by the road." By requiring all members of the solidarity group to agree to the written business plan, it not only focuses the entrepreneurs' attention on their business and gets their peers to agree to the plan, but it also gives a written request for the Regional Director to pass onto the Executive Director. The Regional Director can also pass on their observations and comments as to the viability of the project to the Executive Director. If the group simply as a courtesy to an individual approves a plan, the Regional Director is responsible for conveying those feelings to the Executive Director. Then, the Loan Review Committee can turn down the loan. Everyone saves face, everyone's happy. The initial moment of happiness for a client receiving a loan can only be replicated to the limits of the endowment. It is critical that the budding entrepreneurs receive guidance and direction from their solidarity group because their entire principal and interest is due in full six months to the day after they receive their loan. Many times the entrepreneurs bring portions of their monthly interest due to the semi-monthly meeting and give their funds to the Treasurer to hold until month end. Certain exceptions apply to the monthly payment of interest. If the loan bought a cow, the interest could be paid from selling the milk, but if the loan agreement stipulated that the cow's next two offspring would repay the loan in full, then a longer period than six months would apply, due to gestation period. Successful programs give initial entrepreneurs hope for getting a larger loan, after everyone has received an initial loan. Of course, all entrepreneurs are encouraged to 'save for a rainy day' as their profits come in. Successful programs require all loans to be repaid by the solidarity group, as agreed. The most memorable repayment event I have witnessed, was when an entrepreneur borrowed money to plant a crop on a hillside. Later, after the seed was in the ground, torrential rains came and not only washed his crop away, but also washed away the entire hillside. His solidarity group repaid his principal and interest exactly as agreed! Finally, one of the key players in this cycle and one of the chief beneficiaries of this program are the clergy supporting this effort. Not only do they begin to get more tithes in their churches, but also the more successful the business, the more funds come into the church. Clergy can be paid more, church buildings can be improved and more charitable activities can be accomplished. In fact, if the NGO that brings in the microlending program into the locale desires, agreements may be made that identify a portion of the new funds coming into the churches be given to the NGO's charitable arm, e.g. their food pantry, children's homes, homes for unwed mothers, homes for drug and alcohol rehab etc. Another consideration is that the endowment should not be less
than $20000 USD. Even if the interest rate is 25%, $2500 will not
sustain a program of an Executive Director, a part time bookkeeper
and a part time Regional Director with salaries and office space.
A budget could be developed and input could be sought from those
'on the firing line'. I would absolutely recommend that successful
microlending operations be observed and also recommend bringing
experienced personnel from other successful microlending operations
to help set up the organization. |
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